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Facts
The assessee filed an appeal against the CIT(A)'s order for AY 2017-18. The original return declared a total loss. The Assessing Officer made a disallowance under Section 14A read with Rule 8D, which was partly upheld by the CIT(A).
Held
The Tribunal held that the matter needs to be remanded back to the Assessing Officer for proper verification of the reconciliation statement regarding disallowance under Section 14A. An opportunity of hearing must be provided to the assessee.
Key Issues
Whether the CIT(A) erred in upholding the disallowance under Section 14A without proper verification and whether the assessee was denied a proper opportunity of hearing.
Sections Cited
14A, 8D, 143(2), 142(1), 115JB, 10
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Income Tax Appellate Tribunal, AHMEDABAD “B” BENCH, AHMEDABAD
Before: Ms. SUCHITRA KAMBLE & SHRI MAKARAND VASANT MAHADEOKAR
O R D E R This appeal is filed by the assessee against order dated 04.09.2023 passed by the CIT(A), National Faceless Appeal Centre (NFAC), Delhi for the Assessment Year 2017-18.
The assessee has raised the following grounds of appeal :-
“1. In law and on the facts and in the circumstances of the case, the ld. CIT (Appeal) NFAC has passed the appellate order without providing video hearing as provided in Faceless Appeals Scheme more particularly when Appellant has stated that proper opportunity of being heard should be provided before disposing of the its appeal.
2 In law and in the facts and circumstances of the case of the Appellant, the order u/s.250 of the Income Tax Act, 1961 without considering the submissions made by appellant is bad in law and deserves to be cancelled.
3 In law and on the facts and in the circumstances of the case, the ld. CIT (Appeal) NFAC has erred in dismissing the appeal after completion of more than two and a half years from the date of last hearing of appeal. This is contrary to CBDT Instruction No. 20/2003, dated 23rd December,
2003 and proves beyond doubt that impugned appellate order is bad in law and deserves to be quashed
4. In tee and in the facts and circumstances of the case of the appellant, the Ld. CIT(A) NFAC has erred in upholding the disallowance of Rs.14,51,461/- as per the provisions of Section 14A r.w.r. 8D of the Act when no such disallowance is required.
5. In law and in the facts and circumstances of the case of the Appellant, the Ld. CIT(A) NFAC has erred in thoroughly ignoring the method of disallowance u/s. 14A of the Act made by appellant while filling Return of Income and merely mentioned that the Assessing Officer has recorded his satisfaction, without considering the fact that Assessing Officer has not brought any fact to prove that the expenditure considered for earning exempt income and disallowed in Return of Income by Appellant is incorrect.
6. In law and in the facts and circumstances of the case of the Appellant, the ld. CIT(A) has erred in confirming disallowance made by appellant u/s.14A of the Act without considering the fact that the appellant has already calculated disallowance u/s.14A of the Act as per Rule 8D(2)(ii) at the time of filling Return of Income and while calculating disallowance u/s.14A of the Act, the appellant has considered all the Investments from which exempt income was earned.
7. In law and in the facts and circumstances of the case of the Appellant, the Id. CIT(A) has erred in upholding addition u/s.14A of the Act for Rs.1,92,52,863/- while computing book profits u/s.115JB of the Act when no such addition is called for. It may be deleted.”
The assessee company is engaged in the business of trading of securities and paintings. The original return of income was filed by the assessee on 31.10.2017 declaring total loss of Rs.(-) 3,95,20,351/-. The case was selected for scrutiny and notice under Section 143(2) of the Income Tax Act, 1961 was issued and served on 09.08.2018. Notice under Section 142(1) of the Act was issued on 13.08.2019 and in response to these notices the assessee filed details. The Assessing Officer observed that during the year under consideration, the assessee has shown non-current investment of Rs.2,35,88,11,974/- which includes quoted investments of Rs.2,20,59,08,915/- and unquoted investments of Rs.15,29,03,059/-. The assessee disallowed direct expenses and administrative expenses if Rs.1,81,31,827/-. The assessee was called upon related to disallowance under Section 14A of the Act and after taking cognisance of the assessee’s details and reply, the Assessing Officer disallowed under Section 14A read with Rule 8D(2) of the Act and worked out at Rs.14,51,461/-. Thus, thereby making disallowance under Section 14A of the Act at Rs.1,92,52,863/-. The calculation of book profit was Rs.2,01,45,341/- and 18.50% of book profit as calculated.
Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
The Ld. AR submitted that the ground no.7 i.e. addition under Section 14A of the Act while computing book profit under Section 115JB of the Act is covered in respect of the decision of Special Bench in case of ACIT vs. Vireet Investments Pvt. Ltd. (2017) 82 taxmann.com 415 (Delhi Tribunal) dated 16.06.2017.
The Ld. DR relied upon the Assessment Order and the order of the CIT(A).
We have heard both the parties and perused all the relevant material available on record. Since this is a covered issue, ground no.7 is allowed to the extent that no notional disallowance could be made for the purpose of Section 10 of the Act as per Explanation 1(F) to Section 115JB of the Act.
As regards other grounds, the ld. AR submitted that the CIT(A) erred in upholding the disallowance of Rs.14,51,461/- as per provisions of Section 14A read with Rule 8D of the Act when no such disallowance is required. In fact, the assessee himself has made disallowance of Rs.1,81,31,827/-. The Ld. AR submitted that the assessee has specifically mentioned before the CIT(A) that the method of making disallowance in return of income was certified by the Tax Auditor and after due consideration of all the investments earning exempt income and direct expenses related thereof, this suo moto disallowed has been made. The Ld. AR submitted that the CIT(A) has stated in paragraph no.5.4 of the order that the assessee company has made huge investments in equity shares and mutual funds so that the assessee could maximise its profit on account of investment and minimise the risk of possible loss. During the year under consideration, the assessee company earned substantial amount of tax-free income on such investment. The Assessing Officer quantified the addition under Section 14A as per the provisions of Rule 8D of Income Tax Rules, 1962. The assessee has already made disallowance which was totally ignored by the Assessing Officer as well as by the CIT(A). The details of the investments from which the taxable income also arises and thereby not taken for computing the disallowance as per rule 8D(2)(ii) are as under :-
Particulars Amount (Rs.) Reason for not considering Income from Realty Fund 8,12,78,320/- The income from Realty Funds is taxable in the hands of such funds. Investment in debentures 11,200/- The interest income arising from the debentures are taxable in the hands of the assessee company. Investment in Firm/LLP 3,15,93,259/- The interest income arising from firm/LLP, if any, is taxable in the hands of the assessee company.
Apart from the above, all the other investments (except investment in immovable properties) have been taken into consideration for computing the disallowance under Section 14A in accordance to clause (ii) of sub-rule (2) of Rule 8D. The working of the said disallowance has also been certified by the Tax Auditor. The reconciliation explained in the said fact is as under :-
Particulars Amount as on Amount as on 31.03.2017 31.03.2016 Total investments 239.04 0.08 considered by AO (235.88 crore being non-current investment as appearing in Schedule – 9 of audited annual accounts PLUS Rs.3.16 crore being current investment appearing in Schedule - 13) (refer tabular chart appearing at page no.10 & 11 of Assessment Order) Less: Investment in debenture of Rs.11,200/- resulting into taxable income (separately disclosed in Schedule-9) Less: Investment in real 8.12 -- estate fund (separately disclosed in Schedule-9) Less: Investment in 3.16 -- partnership firm (separately disclosed in Schedule – 13) Add: Diminution in value 1.54 of investment in Anagram Knowledge Amount considered by 229.30 0.08 appellant for the working under Section 14A (refer tabular chart at page No.5 and 6 of Assessment Order)
Thus, the Ld. AR submitted that the same should have been taken into consideration by the Assessing Officer as well as by the CIT(A).
The Ld. DR relied upon the Assessment Order and the order of the CIT(A) and further submitted that the working as per the Assessment Order should be followed as taken into account by the CIT(A) in paragraph nos. 5.4 & 5.5 of the appellate order.
We have heard both the parties and perused all the relevant material available on record. The observation of the Assessing Officer that the assessee has disallowed direct expense and administrative expenses suo moto but the fact remains that the assessee is also claiming that he has not incurred any expenditure on tax free income needs to be verified in the context of the reconciliation statement given by the assessee herein above. The same needs to be verified by the Assessing Officer as the same has not been filed before the Assessing Officer at the time of assessment proceedings. Therefore, the matter is remanded back to the file of the Assessing Officer for proper verification of the reconciliation statement and after taking cognisance of the provisions of Section 14A read with rule 8D(2)(ii) and adjudicate the same as per Income Tax Statute. Needless to say, the assessees be given opportunity of hearing by following the principles of natural justice. Thus, ground no.4 is partly allowed for statistical purpose.
As regards ground nos.1 to 3 and ground nos.5 & 6, they are in consonance with the ground no.4 and hence partly allowed for statistical purpose.
In the result, appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the open Court on this 2nd January, 2025.